Question

Which of the following is a bias in the CPI? i. new goods bias ii. index change bias iii. commodity substitution bias Option 1) ii only Option 2) i and iii Option 3) i, ii, and iii Option 4) i only

Answer 1

The correct option is:

Option 3) i, ii, and iii

All three of the biases mentioned in the options are sources of bias in the Consumer Price Index (CPI):

i. New goods bias: This occurs when the CPI fails to account for the introduction of new goods and services, which may provide more value for the same price or may be better substitutes for existing goods.

ii. Index change bias: This refers to the bias introduced when the CPI's index changes, often due to changes in the basket of goods and services used to calculate the CPI. These changes may not accurately reflect consumer behavior.

iii. Commodity substitution bias: This bias arises when consumers change their purchasing behavior in response to changes in relative prices. The CPI assumes that consumers continue to purchase the same mix of goods, even when relative prices change.

So, all three biases are relevant sources of bias in the CPI.